Iron ore plunge to blow $3.6B hole in WA budget

Iron ore producers and investors aren't the only ones getting hurt by the continuing weakness in the iron ore price.

Western Australia, which contains the Pilbara iron ore region that has been a powerhouse of economic growth for Australia for decades, will see $13 billion less in royalties over the next four years as a result of low iron ore prices, which last week fell to levels not seen since 2008 – $46.70 a tonne at the Chinese port of Tianjing. The state's Treasurer, Mike Nathan, also proclaimed the dismal iron ore price has finally reached the doorstep of the state legislature, telling The Sunday Times the price will "punch a $3.6 billion hole in the 2015-16 Budget alone," Perth Now reported.

The state is already facing a $1.6 billion deficit this year and Treasury officials are worried it could balloon to $2.5 billion, according to Perth Now. The WA government is also pressing for an end to a three-year lag currently in place for calculating mining royalties the Goods and Services Tax, which penalizes states that rely on volatile resource revenues.

Meanwhile the Reserve Bank of Australia is expected to levy another rate cut this coming week aimed at lowering the value of the Australian dollar. The move would make Australian exports priced in US dollars, such as iron ore and coal, more competitive. The markets are betting the RBA will follow-up a February easing of interest rates with another quarter-point cut to 2 percent, an all-time low, Reuters reported.

The reversal of fortune must come as a bitter pill to swallow for Western Australia, which two years ago attracted $20-billion in investments from resource giants like BHP Billiton (NYSE, ASX:BHP), Rio Tinto (NYSE, LON, ASX:RIO) and Fortescue Metals Group (ASX:FMG) as they ramped up production from the iron-ore rich Pilbara to capture prices hovering around $120 a tonne. The state also derives significant revenues from gold-mining. To cope with the iron ore plunge, Western Australia has said it will reduce wages paid to government workers. Replacement workers on government projects will be paid 60 percent of their predecessors, a measure that will save around A$1.3 billion, the Wall Street Journal said last December.

The price collapse has resulted from a perfect storm of oversupply and shrinking demand from key consumers.

Steel consumption in China which imports more than 70% of the world's iron ore fell last year for the first time since 1995 and the slowdown has coincided with a flood of new supply.

Led by the Big 4 – Vale (NYSE:VALE), Rio Tinto, BHP Billiton and Fortescue Metals Group – iron ore miners invested north of $100 billion in new projects and expansions since the start of the decade which pushed the market into surplus late 2013.

After giving up 47% in 2014, the price of iron ore is now down more than a third in value this year.